The taxation system in India is a vital constituent for the nation’s economy. The tax department levies several taxes on the services and products that are availed by the citizens of India. These taxes intend to add better shade to the products and services used by the consumers. Taxes including Income Tax, Property Tax, Service Tax, and tax deducted at the source are the most common form of taxation. These are the most familiar taxes for the people living in India. However, here a question arises, ‘How taxation in India have an effect on the non-resident Indians (NRIs)?’
NRIs also have to make payment of appropriate and applicable taxes whenever they are covered under the Income Tax Act, 1961. NRI taxation deals in all the details about the taxes for an NRI and how they must deal with taxes. The NRI taxation system covers all the aspects of property tax, wealth tax and income tax.
NRI Taxation System in India:
It is important to understand how an NRI becomes accountable to make payment of tax in India. As per Foreign Exchange Management Act (FEMA)’s definition, a civilian of origin of India can be referred to as NRI only if s/he spends a certain number of days abroad and subsequently, a comparative period of absence is maintained in India.
By default, an income that an NRI earns abroad is exempted from tax in India. However, if the earnings in India via sources like mutual funds, term deposits, capital gains from the investment in shares, and property rental exceeding the fundamental limit as mentioned in the IT Act, 1961, an NRI will have to file an income tax return.
Taking the imposed taxation on the NRI’s income into consideration via sources in India, TDS is charged at the maximum rate on interest produced on the capital gains earned from term deposits, mutual funds and shares. Most often this cancels out the need to file a tax return. However, on the other hand, it might also occur that the overall TDS does not include the NRI’s basic tax liability. This makes the filing of returns the only method to file a claim for tax refunds.
NRI Taxation Rules:
Rules of taxation in India for an NRI vary by a considerable degree while comparing to the rules, which are applicable for the residents of India. A few important points to remember are:
- Tax slabs for NRIs depend only on the earnings barring age, gender or another requirement.
- For TDS, all the earnings of NRIs are levied heedless of threshold value.
- Tax filing is not usually needed for an NRI, if his/her income is liable to clauses u/s 115G of the IT Act 1961.
- No economical deductions are pertinent to investment incomes except under certain conditions.
The Income Tax Act, 1961 includes special provisions under the sections mentioned below:
Section 115D - Calculation of Tax:
- This section does not allow the investment income calculation of an NRI.
- In case the assessee is a non-resident Indian –
No tax deduction is permitted on the gross total income, which includes the only earnings from long-term capital gains and investment.
If the income from long-term capital gains and investment form only a portion of the gross total income, this kind of income will be deducted and the rest of the amount might qualify to avail tax deductions under the Chapter VI-A.
Tax levied on Income from the Long-term Capital Gains and Investment (Section 115E):
If the overall income of NRI includes the following:
- Income from long-term capital gains
- Earnings from long-term capital gains or investments of any asset apart from an Indian Company, or debentures issued by or the deposits with any non-private Indian firm, any Central Government security or the assets further mentioned by the Government of India.
Then the payable tax by the non-resident Indian will be the total of –
Tax calculated at the interest rate of 20 percent on the income from investment as specified in 2(a).
Tax computed at the rate of interest of 10 percent on long-term capital gains as specified in 2(b).
The tax levied if both clauses, i.e. 2(a) and 2(b) has been deducted from the aggregate income.
Non-chargeable capital gains on the transfer of the foreign exchange assets in some cases (Section 115F) – This, generally, involves the exclusions where the foreign exchange asset transfer won’t incur any sort of tax.
If the non-resident Indian invests a portion of whole of the profits of capital gains from foreign exchange asset transfer into assets mentioned by the Government of India within a tenure of 6 months and the acquisition cost of new assets is equal to the earlier asset value like capital gains, won’t be levied.
If an asset of foreign exchange is converted or transferred into money within a period of 3 years from the acquisition date, capital gain not levied from the transfer of asset depending on the cost of the new asset will be a taxable income.
Non-filing returns of Income in certain cases (Section 115G):
- In case the total income during the preceding year is only via earnings from the long-term capital gains and/or investments.
- Tax deduction at Source (TDS) has been subtracted from the aforementioned income.
Advantages of Taxation after the NRI becomes resident (Section 115H):
This means in case the person was NRI in the preceding year and becomes the resident in any following year that makes him able to be gauged differently under the tax laws, the return of income from the investment on the assets of foreign exchange are required to be declared. This will permit the taxation provisions to remain unbroken until the assets are converted into any monetary amount.
Provisions’ non-application for the NRI Taxation (Section 115I):
This rule is not included in which the NRI can pick ifs/he wants his/her earnings to be taken into consideration from the capital gains or investments. If an individual opts not to, then all the earnings from various sources in India are deemed taxable.
All the aforementioned rules are liable to change as per the direction and discretion of the Income Tax Department of India and the Central Indian Government.
NRIs – Tax Exemptions:
The types of income, which are tax exempted, are mentioned below:
- Interest produced on FCNR/NRE accounts
- Interest earned on the Government issued notified bonds and savings certificates.
- Long-term capital gains from the listed equity-oriented mutual funds and equity shares.
- Dividends earned from the shares of domestic companies of India.
- Capital gains are exempted via Sections 54, 54F, and 54EC.
All the aforementioned exemptions are liable to tax laws that are prevailing at that time.
Comprehensive Picture of the NRI Taxation:
It is important to understand whether the individual is referred to as an NRI in accordance with the guidelines introduced by the Foreign Exchange Management Act (FEMA). After that, the aforementioned deductions and exemptions are to be taken into consideration so that the individual have made payment of excess tax in any situation. The Non-resident Indians cannot make use of forms 15G and 15H to ignore TDS so that the TDS exceed the liability of tax, they will require filing ITR together with the proof of investments and earnings so as to avail the tax refund.
FAQs on NRI Taxation
- Who is an NRI?
NRI is the full form for Non-Resident Indian. Any individual of Indian origin who is of Indian birth or descent but lives outside the Republic of India is called an NRI.
- Who is an NRI under FEMA?
An NRI as per FEMA guideline is an individual resident living outside India who is either a PIO (Person of Indian) origin or a citizen of India.
- What is the time limit to file the Return of Income?
Time limit to file the return of Income is enlisted in the table below:
Type of Person
An individual whose accounts are needed to be audited under the Income-tax Act
By 30th September of the AY
An active partner in a firm whose accounts are needed to be audited under Income Tax Act
By 30th September of the AY
A firm other than the firms who are needed to publish their account’s reports in Form 3CEB under section 92E
By 30th September of the AY
An individual who is required to present his account’s reports in Form No. 3CEB
By 30th November of the AY
Any other assessee
By July 31st of the AY
AY here represent the current Assessment year for which an individual or a firm is filing the return of income.
- Is there any tax concession available for NRI's?
NRIs get a concessional tax of 20% on their investment income and 10% on long term capital gains from specified assets that are obtained from convertible foreign exchange.
- What is a Tax Exemption Certificate?
Generally, the prescribed income tax rate for an NRI’s income is the maximum tax rate at which relevant Income is taxable in India. However, in the majority of the cases of NRIs, the actual tax liability is lower than the TDS. However, the higher deduction of tax so made is generally not claimed as a refund by filing ROI. Whenever a person’s actual tax liability as per the provisions of the Act is lower than the TDS, he may apply for Tax Exemption Certificate (TEC) from the Indian Income Tax Department.
- Who can apply for a tax exemption certificate?
An NRI who receives an income after tax being deducted at source can apply for a tax exemption certificate if his income in India is less than Rs. 1.5 lakhs per annum in India.
- What is the time taken to issue such certificates?
A tax exemption certificate is usually issued between 10-25 days.
- For how much period the exemption certificate is valid?
The tax exemption certificate has a validity period of 1 to 3 years.
- What does an NRI need to do after receiving the tax exemption certificate?
The NRI who has received the Tax Exemption Certificate needs to submit it to the income payer who will follow the certificate guidelines to not deduct taxes or may deduct taxes at a lower rate.
- How long does it take to issue a tax exemption certificate?
It takes 30 days to issue the tax exemption certificate.
- For how long is the tax exemption certificate valid?
The tax exemption certificate is valid for 1 year.
- What are the Tax-liabilities of an NRI leaving India for good?
The individuals who are planning to leave India for a longer period of time or forever, they have to take care of certain formalities in order to keep their financial affairs on track in the country. They need to inform their respective bankers about their decision to leave India so that their bank accounts can be converted to an NRI account.
The individuals also need to update their residential status as NRIs with the income tax department to avoid any repercussions later on.
- What are the tax liabilities of the NRIs who have returned to India for good?
NRIs who have returned to India for good should pay special attention to their financial affairs. They should be aware of the various regulations of Banking Regulations and FEMA (Foreign Exchange Regulations Act)
He should once again inform the income tax department about his new residential status from non-residential to residential.
- What are the different residential statuses defined for individuals under the Indian Income Tax Act, 1961?
Under the Income Tax Act, 1961, there are two residential statuses defined for individuals, depending upon their period of stay in India–
- i) Resident Indian
- ii) Non-Resident Indian (NRI)
- Who is a person of Indian origin?
An individual will fall under Person of Indian Origin definition if s/he is able to fulfil either of the conditions given below:
- S/he at any point of time has held Indian Passport.
- Her/his parents or grandparents should be a citizen of India at any point of time.
- S/he should be married to a person of Indian origin.
- What all tax exemptions are available to NRIs?
The different tax exemptions available to NRIs are:-
1) Their bank deposits are exempted from wealth tax in India.
2) Tax exemptions under Section 80D (Health insurance premium payment)
3) Other Deductions under Section 80 G
- Is NRI liable to Wealth-tax in India?
NRIs are liable to pay the wealth tax applicable for the income earned in India. Any income earned by them outside India (in foreign countries) is exempted from wealth tax.
- Are NRIs allowed to buy RBI Relief Bonds?
Currently, NRIs are not allowed to buy RBI relief bonds.
- Can NRIs avail of indexation benefits?
Yes, NRIs can avail of indexation benefits on LT gains earned from certain listed shares & securities.
- Do NRIs have to file ITR in India?
There isn’t any obligation for NRIs to file ITR unless their income crosses the threshold of Rs 2 lakhs.
- What is the due date of filing ITR for NRIs?
NRIs are required to file the ITR by 31st July of the current financial year.
- Is there any basic tax exemption limit for NRI individuals?
Unlike resident Indians, wherein there are certain tax exemptions, NRIs don’t have any tax exemption limit. Every single rupee earned by the NRIs falls under the TDS category at a rate of 30%.
- Is there any TDS provision for NRIs who reside in countries where there is no tax liability?
India has signed DTAAs with the countries that don’t have any personal tax liability. This scenario is taken care of by different banks in different ways. For instance, SBI has a procedure wherein NRIs have to submit a self-declaration form if they are residing in countries with zero tax liability.
Once the NRIs have submitted this self-declaration, SBI will deduct TDS at the reduced rate according to DTAA rather than the mandatory 30% TDS rate.
- What are the documents and other details required for filing ITR by NRIs?
Below-enlisted is the different documents and other details required for filing ITR by NRIs:
- Supporting documents for monthly income details earned in the foreign country
- Details of TDS deducted outside India (if there is any)
- Copy of ITR filed outside India, (if there is any)
- Details of Living Allowance (if there is any) along with the Indian salary (if received in foreign currency), Form 16 (if any salary income earned in India)
- Other income details in India
- TDS details deducted in India besides the salary
In case of DTAA (Double Tax Avoidance Agreements) between India and the foreign country the NRI is residing in:
- Form 16
- Salary slips of 12 months
- Foreign Salary Slips
- W2 Form
- Do NRIs need to file ITR in India?
NRIs that have a taxable income in India more than the prescribed tax exemption limit of Rs.2 lakhs need to file ITR in India. However, if they have earned income from either of the following sources, they will be required to file ITR in India, irrespective of the fact whether their income is below the basic exemption limit:
- Income earned from Long-Term Capital Gains that are tax liable
- Income earned from Short-Term Capital Gain on equity or equity-related mutual fund shares
Here, it’s important to understand that non-filing of ITR may lead to a penalty of INR 5000 for every single year.
- What are the different taxable incomes for NRI individuals in India?
Different taxable incomes for NRI individuals in India are:
- Income accrued/earned in India
- Income deemed to be received or received in India
- Income deemed to be accrued in India
- What are the different tax exemptions for NRI individuals?
- Interest earned on FCNR (Foreign Currency Non- Repatriable ) & NRE account
- Interest earned on savings certificates and notified bonds issued by the government
- Dividends from domestic companies’ shares
- Long term capital gains earned from listed equity and equity-related mutual fund shares
- What is tax consideration for NRE and NRO Accounts?
Interest earned from NRE account is tax exempted; whereas, interest earned from NRO account will be taxable.